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A dreadful week for stocks - Views on News from Equitymaster
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  • Oct 31, 2009

    A dreadful week for stocks

    All major markets the world over fell like a set of bowling pins this week. India too was not spared, and in fact headed the list of losers. The BSE-Sensex fell 5.4% during the week. A host of reasons led this fall. Weakness in commodity prices, poor results by some large companies, skepticism about the recovery being only liquidity driven, fears about the stimulus packages being withdrawn, rising inflation, and expectations of an impending exit by the government of its loose fiscal stimulus were some overshadowing factors.

    Markets in the rest of the world had a similar story to tell. Apart from India, Germany (down 5.7%), Brazil (down 5.4%), and France (down 5.3%) led the fall. The US ended the week lower by 2.6%, while China fell by 3.6%. Some disappointing results from large companies like PetroChina and National Australian Bank weighed down on Asian markets, further fueling concerns that markets may have gotten ahead of fundamentals and that stocks may have risen faster than the pace at which earnings will perhaps rise going forward.

    Source: Yahoo Finance

    Sectoral indices in India too were in a sea of red with not a single index seeing any rise during the week. The BSE Realty index led this fall with a miserable 15.4% decline. Realty stocks were hit by the RBI's decision to make loans to commercial property developers difficult. The RBI rightly indicated in its mid-term monetary policy review note - "In view of large increase in credit to the commercial real estate sector over the last one year and the extent of restructured advances in this sector, it would be prudent to build cushion against likely non-performing assets."

    The RBI increased the provisioning requirement for advances to the commercial real estate sector from 0.4% to 1%. This is surely going to hit realty companies that are looking to borrow from the banks to fund their commercial real estate development plans. This will not only make it difficult for realty companies to get sufficient loans, it will also likely make such loans more expensive. We see this is a positive development given that the RBI has tried to nip the sort of bubble that was building in the realty segment, especially given the large fund raising and dilution by some leading names in anticipation of better demand.

    Source: BSE

    Metal stocks also took a major beating. The BSE Metal index fell 9.6% during the week. Tata Steel, which contributes almost 20% to the index, saw a lot of weakness. This was a direct result of a weak performance reported by the company for the quarter ended September 2009. As per the standalone numbers (that exclude Corus), sales declined by 16% YoY during 2QFY10. This came on the back of pressure on steel prices, as the company's volumes reported a decent 19% YoY growth. Further, its net profits almost halved from 2QFY09 levels.

    The next was the BSE Banking index which fell 8.8%, with the highest losses coming in from stocks like ICICI Bank, SBI, and IDBI Bank. RBI's lackluster forecast for credit growth during the current fiscal that ends in March 2010 has seemingly hurt these stocks. The central bank's decision to raise SLR (statutory liquidity ratio) requirement to 25%, from 24% currently, has also had its impact. This is given that a higher SLR would somewhat restrict bank loans, and also acts as an indication that the RBI will soon start raising interest rates.

    Movers and shakers during the week
    Company 23-Oct-09 30-Oct-09 Change 52-wk High/Low
    Top gainers during the week (BSE-A Group)
    Crompton Greaves 346 382 10.4% 395/100
    Balrampur Chini 138 149 8.4% 160/30
    Tata Motors 529 565 6.7% 620/122
    United Spirits 1,018 1,071 5.2% 1,090/426
    Dr. Reddy's 960 1,009 5.1% 1,030/357
    Top losers during the week (BSE-A Group)
    Everest Kanto Cylinder 202 139 -31.3% 233/84
    Rel. Natural Resources 84 64 -24.5% 107/35
    Indian Overseas Bank 133 101 -24.1% 141/38
    BOI 439 334 -24.1% 475/180
    Reliance Communications 230 176 -23.3% 351/131
    Source: Equitymaster

    As also referred to above, RBI announced its mid-term review of the monetary policy for 2009-10 during the week. While it decided to keep its key interest rates unchanged, the central bank hiked the statutory liquidity ratio (SLR) to 25% from 24%, thereby sending out initial signals towards raising interest rates in the future. Going by the RBI's upward revision of target inflation by March 2010 end to 6.5%, from 5% earlier, it seems clear that the bank's next step will be towards higher interest rates. And the markets seemed to fear just that given that the Sensex saw a big dip immediately after the central bank cleared its intentions through the policy documents.

    The results season continued in full swing during the week. In the IT pack, Wipro announced good results for the quarter ended September 2009. On a sequential basis i.e., as compared to 1QFY10, the company's consolidated revenues and profits grew by 10% QoQ and 14% QoQ. A 0.4% QoQ expansion in operating margins (21.7% during 2QFY10) led to a 12% QoQ growth in operating profits. In addition, higher other income and profits from associates added to the bottomline growth. As for Wipro's 1HFY09 performance, revenues and profits are higher by 6% YoY and 16% YoY.

    In auto, Tata Motors and M&M announced results. Tata Motors recorded a standalone topline growth of 13% YoY on the back of a 17% growth in volumes during the quarter. Operating margins expanded by a strong 5.8% due to lower input costs in a low inflation environment. As a result, operating profits nearly doubled over the same quarter last year. Margin expansion coupled with new norms for forex accounting helped the company post a dazzling growth of 110% in net profits during 2QFY10. As for M&M, the company recorded a net profit growth of 148% YoY excluding exceptional items. This was on the back of a 35% YoY growth in net sales. The surge in bottomline was largely aided by a sharp improvement in operating margins that improved to 18.2% in 2QFY10, from just around 5.9% in 2QFY09. Margins were in turn aided by a sharp fall in raw material costs (as percentage of sales). The company has thus benefited tremendously from the YoY fall in prices of commodities like iron, steel and aluminium. As part of its outlook for the near future, the management has cited a weak agricultural output and its impact on rural income and demand as a key concern. Indeed, auto companies have been among the best performing sectors this result season.

    Finally, telecom major Bharti announced its 2QFY10 numbers yesterday. The company's sales grew by 19% YoY during 1HFY10 and 16% YoY during 2QFY10. Growth during the first half was led by the mobile services and passive infrastructure businesses, which reported a growth of 15% YoY and 43% YoY respectively. During the quarter, its average revenue per user (ARPU) declined by 24% YoY and by 9% QoQ. Further, average minutes of usage (MOU) declined by 15% YoY and 6% QoQ. On the brighter side, operating margins remained stable at around 40.7%. Also, net profits grew by 28% YoY during 1HFY10. This growth in bottomline was mainly on the back of a stable operating performance as also interest income. Though the results weren't all that bad, the markets don't seem to be all that happy as the stock saw another trashing post announcement of the results.

    As if all the other negatives weren't good enough, higher inflation numbers too spooked the markets towards the end of the week. As a matter of fact, numbers released by the Commerce Ministry suggested that India's inflation (as measured by the wholesale price index or WPI) stood at 1.51% for the week ended October 17, as compared to 1.21% in the previous week. This clearly vindicated the RBI's concerns that inflation is rearing its head again, and that the economy must get ready for higher interest rates in the future.



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